Corn outlook brighter, analyst says

Paul Hollis | Feb 07, 2004

“We have good prices now – not the best we’ve seen, but certainly better than we’ve had over the past few years,” said George Shumaker, University of Georgia Extension economist at the Georgia Corn Short Course held in Tifton.

One reason for the good prices, says Shumaker, is the world supply and demand situation. “Over the last several years, we’ve been using more corn than we’ve been producing throughout the world. That has allowed stocks to continue dropping, and we all know that when stocks come down, prices generally go up. That is the underlying factor at play,” he says.

The United States didn’t see much change in planted corn acres this past year, he says, although harvested acres did increase. “In the coming year, I expect to see a slight acreage increase in 2004, somewhere around 800,000 acres. If corn growers increase acreage, the next piece of the puzzle is determining supply, or what Mother Nature allows us to reap at the end of the year,” says Shumaker.

The U.S. yield trend has trended upwards since 1980, notes the economist. “If you look at the trend line, and the number we used in determining our yields for 2004, it would represent the second largest national yield we’ve ever seen. That’s how rapidly technology is advancing, and corn growers are doing a good job of adapting. We’re predicting about 141.5 bushels per acre,” he says.

Shumaker predicts a slight increase in production, a small increase in acreage, and a small reduction in yields for 2004.

“We don’t see a lot of change in carry-in stocks,” he says. “Carry-in stocks are going to be reduced. So our total supply won’t change much if this scenario plays out. While we don’t see an increase in total supply, we do see a nice increasing trend in usage. Usage is increasing, and that is a very positive factor underlying our market.”

There are three major market segments in corn usage, says Shumaker. One is livestock feed or grain-consuming animal units, he says. “We’ve probably about hit the bottom in terms of animal numbers, and that likely will start to turn up over the next couple of years. We might actually see an increase with the 2004 crop.”

It’s difficult, he says, to predict what effect mad cow disease might have on the 2004 crop. If the problem goes away, he says, there probably won’t be an impact on beef consumption

“We’ll see a return to beef exports, and this whole issue won’t be a problem. But it’s still a wild card out there, and it still could become a bigger problem.”

The second major use category, says Shumaker, is food, seed and industrial use, or the amount of corn consumed by humans. In the past 10 years, there have been major changes in market segments, he says.

“If you look at the 1994 crop, you’ll see that food, seed and industrial use was less than 20 percent. That number has jumped up to about 23 percent of our total usage. That’s a flip-flop in relation to exports.” Food, seed and industrial use includes elements such as ethanol, corn sweeteners and beverages, notes Shumaker.

“This past year – from the 2003 crop – we’ll see about 1 billion bushels of corn converted into ethanol. One in every 10 acres is being used in the production of ethanol. Several ethanol plants currently are under construction, and this will significantly increase the amount of corn used for this purpose. Within a couple of years, we’ll probably see 1 in 9 or 1 in 8 acres being used for ethanol.”

The export segment of corn usage is difficult to predict, he says, due to factors such as international relationships.

“At present, we’re going through a period of a weak dollar in relation to other currencies. That generally is seen as being very positive for exports, and it means the price of corn to foreign buyers is cheaper than in the past. When the price of something goes down, people consume more of it. That’s the value of having a weak currency – it should increase our exports, and perhaps it has.”

With little change in total supply and an increase in usage, corn stocks will be tight, says Shumaker. “Prices should strengthen or, at the very minimum, hold their own and probably rise. The stocks-to-use ratio is a good indicator. Generally, we see a strong inverse relationship. When the stocks-to-use ratio falls, prices rise. Sometimes, it doesn’t take much of a change in the ratio to give us a very nice change in price.

“We’ll end up with a stocks-to-use ratio down around 8 percent. That would be one of the lowest ratios we’ve had in some years, and that should give us very strong prices. In the 2003 crop, we’ll average somewhere around $2.25 to $2.30 per bushel. This coming year’s average could be significantly higher than that, up to about $2.90 per bushel.”

It’s interesting, says Shumaker, to look at the demand curve for stored corn in the United States. The market isn’t willing to pay as much for U.S. corn as it once did, he says, due to the increased production of feed grains in other parts of the world.

“We went through this same thing with soybeans – soybean growers understand this relationship very well. Once the South Americans became a major player in the soybean market, our prices went away. We’re beginning to see the same thing occurring in the production of feed grains. Increased competition will have an impact on our prices.”

The current corn price trend us moving upwards, says Shumaker. “If I’m holding corn, I want to look at the March contract and see what it’s doing. We had a nice jump in March futures, and my telephone started ringing. Growers wanted to know what they should do if they had grain in the bin.

“If you put corn in the bin in the hopes that the market would rally, then you need to start selling. If you’re afraid that the market will continue to rise, and that you’ll sell too quickly, then buy a call option to get back in the market. Rather than risking corn valued at $2.70, you’ll risk only 10 cents. If the market goes down, the maximum you’ll lose is 10 cents versus the value of the market decrease.”

New crop corn contracts, says Shumaker, have rallied up to about $2.70. If this trend continues, more growers may plant corn in 2004, he adds.

“We could have an acreage increase of 1.5 million to 2 million acres rather than 800,000 acres, and that will affect our supply and demand balance. If this occurs, we won’t see $2.90 prices this year. The higher the market goes, the more acres we’ll see, and the market likely will come down at harvest. It might be a good time to start selling the crop that is going into the ground.”